Off-balance sheet arrangements

Special purpose entities
Loan securitizations are an important part of the financial markets, providing market liquidity by facilitating investor access to specific portfolios of assets and risks. In a typical loan securitization structure, the Bank sells assets to a special purpose entity (SPE) and the SPE funds the purchase of those assets by issuing securities to investors. SPEs are typically set up for a single, discrete purpose, are not operating entities and usually have no employees. The legal documents that govern the transaction describe how the cash earned on the assets held in the SPE must be allocated to the investors and other parties that have rights to these cash flows.

In the normal course of operations, the Bank securitizes residential mortgages, personal loans and credit card loans to diversify its sources of funding and to optimize the management of its balance sheet. Bank-originated securitized assets not included on the consolidated balance sheet amounted to $15 billion compared with $18 billion a year ago. Further details are provided in Note 4 of the Bank’s consolidated financial statements

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In addition, the Bank sells trading securities to SPEs in conjunction with its balance sheet management strategies. The Bank does not retain effective control over the assets sold. Assets sold under such arrangements at October 31, 2002 amounted to $5 billion (2001 – $2 billion). The Bank enters into total return swaps with the sale counterparties in respect of the assets sold. Market risk for all such transactions is tracked and monitored, and market risk capital is required.

The Bank also assists its clients in securitizing their financial assets. The Bank may provide administrative, credit enhancement or liquidity facilities to the resulting SPEs. The Bank does not provide employees to the SPEs, nor does it have ownership interests in these SPEs and all fees earned in respect of these activities are on a market basis.